dna edit: Banking options

India’s biggest corporate groups have applied for commercial banking licenses sparking concerns over the leverage that a foothold in the banking sector would accord them. Among the 26 applicants are Tata Sons, the Aditya Birla group, the Anil Ambani group, and Larsen and Toubro. With stakes in manufacturing, power, infrastructure, telecom and retail, the entry of these behemoths into the banking sector creates alternate centres of concentrated economic power. But with 40 per cent of India yet to get banking access and financial inclusion as its goal, the Reserve Bank of India has held its ground.

Institutions like the IMF and the Parliamentary Standing Committee on Finance are worried about possible conflicts of interest and unnecessary risks to the financial system. But RBI’s guidelines, issued in February, mandate promoters to set up the bank through a separate holding company “ring-fenced” from other group activities. The RBI will vet the applicants through a two-step process: an internal prima facie eligibility check followed by a high-level advisory committee comprising banking and financial sector experts.

Of the ten licenses RBI granted in 1993, four licensees merged with other lenders after struggling to strike out on their own. With the licensees of the 2001-02 round having a negligible impact, the RBI has taken a conscious decision to invite corporates with deep pockets to boost banking access and institutional lending. But can the RBI hold these prospective bankers to its guideline requiring 25 per cent branches in unbanked areas? Too often, corporates enthusiastically bid for projects with unrealistic expectations and then find them unviable. The presence of India Post among the 26 applicants, in this context, is reassuring.

With 1.55 lakh post offices across India, 1.4 lakh of these in rural areas, India Post’s network dwarfs the urban bias of the country’s 90,000 bank branches. By March 2012, its small savings scheme had mopped up over Rs1.9 lakh crore through 26 crore savings accounts. Though two crore accounts were closed in 2011-12, the staggering figures speak of the relevance of the post office in RBI’s ambitious financial inclusion push. However, India Post must ramp up its ongoing core banking efforts.

The worries over corporate influx into banking, in the context of recent instances of crony capitalism, are valid. The RBI has been accused of leniency towards banks and officials perpetrating irregularities. Its response to the recent Cobra Post expose, showing commercial bankers aiding in money laundering, should have been harsher. By penalising three banks a pittance -- between Rs1 crore and Rs5 crore -- and not demanding the heads of senior officials, the RBI has cut a sorry figure. With new players, who bring along the risk of conflict of interest, the RBI must show willingness to flex and use its regulatory muscle.